What is Insurance?

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Insurance is a law permitted contract between two parties in agreement. This simply implies that before insurance can take place there must be an agreement between the two parties involved( the insurance company and the individual). 

The individual must agree to accept the policies or terms of the insurance company before He/she can get insurance.

Insurance is a great relief to the individual involved(the insurer). Because it serves as a mechanism for risk transfer, whereby the individual transfers risk to the insurance company in order to get cover for future losses or inconveniences which might include financial loss, damage, illness, or death, due to unforeseen events.

Insurance is the most effective management tool for risk that shields the individual and businesses involved from financial risk that arises by chance. 

Insurance guarantees help the insured through finances because it is an agreement made in monetary terms. In return, the individual(assured) pays a particular amount of money (premium) for the agreement, which can be paid annually or monthly according to what they agreed on.

Some Of The Terms/words Involved In Insurance

Policy Limit

This is the maximum amount of money an insurer pays out to an insurance policyholder after an insured loss. This is defined based on what is insured and the kind of policy the insured holds.

Policy Holder

This can be the insurance company in whose name an insurance policy is held.


This is the particular amount to be paid by the insured to an insurance company for a contract of insurance.

How Does Insurance Work?

Insurance works on the grounds or basis of risk pooling. That is they carry out or render their services by pooling together the resources of a large number of people with the same or similar risk to make sure that the few people who experience loss are protected. 

The insurance main model of operation is by assuming and diversifying risk. The insurance company also tend to get revenue by charging premium from individuals in exchange for coverage, then reinvesting the premiums received into other interest-generating assets. Such as private firms, and insurance company tries to market effectively in order to reduce administrative costs.

Types Of Insurance Policy

There are so many types of insurance policies which include:

  • Life Insurance Policy. 
  • Health Insurance Policy. 
  • Travel Insurance Policy.
  • Property Insurance Policy. 
  • Motor Insurance Policy. 
  • Monetary Insurance Policy.

Let’s go for detailed information.

Life Insurance Policy 

This Life Insurance Policy is a policy that exists between an insurer and a policyholder. A life insurance policy guarantees the insurer pays a sum of money(premium) to named beneficiaries when the insured policyholder dies, in exchange for the premium paid to the policyholder during their lifetime.

Health Insurance Policy

It works the same way your car or home insurance works. This policy protects you from paying the full costs of medical services when you’re sick or injured. You or your employer choose a plan and agree to pay a certain rate(premium) each month.

Travel Insurance Policy

This policy plays its role in travel. It is a policy or plan you purchase that protects the individual from certain financial risks and losses that can occur while traveling. 

These losses may be insignificant like a delayed suitcase or significant like a last-minute travel cancellation or medical emergency overseas.  Benefits vary by plan between the insurance company and the individual.

Motor Insurance Policy

This is an insurance policy that covers the policyholder in case of financial losses, resulting from an accident or damages sustained by the insured vehicle. 

The insurance made also covers damages to third-party and third-party property or vehicle along with compensating for owner’s losses as well, that is if the plan is comprehensive motor insurance.

Property Insurance Policy

Property insurance provides or guarantees property protection coverage or liability coverage for property owners who has this plan with them. Like with other policies, a premium is also paid by the individual, according to what was agreed on.

Benefits Of Insurance

Insurance has a recognizable and most important benefit which is the payment of losses of their clients. Their ability to cover for losses and compensate an organization is already an advantage or benefit to their clients. 

The insurance company also serves as a risk reliever. It is so because clients don’t have to bother with future damages knowing fully well that it would be taken care of if any occurs. 

Insurance also provides capital, which is always made available for the individual involved in the time of financial insufficiency or problem, that might have been caused by due to unforeseen and
unfavorable events that occurred.

Insurance also helps economic progress and growth through its offer, let’s say if an establishment that has an insurance policy encounter any challenge based on finances the insurance company helps the company to get back to its normal state, and thereby continue rendering its service in the society. 

But when the reverse is the case, whereby the establishment doesn’t have any insurance policy the service rendered to the society by that establishment is lost, depletion in the progress of the economy. It also helps to improve efficiency through the services they render.

Why Is It Necessary To Get An Insurance Policy As An Individual?

Planning is one of the essential things in a person’s life. A person without a plan has no vision. In love as humans we are, we encounter challenges and difficulties which might affect our lives negatively.

It’s true you don’t plan to encounter any, but what if it just happens by chance, what will you do? What if you experience insufficient finance to fund yourself and your family if you happen to have one? The answer gives you the reason for insurance. 

Unforeseen tragedy can leave one physically and mentally drained. Insurance is just like a future plan, but in this case, you’re planning against future failure, not that you’re praying for any to happen, but by chance, if any occurs it won’t pull you down. 

Insurance gives you peace of mind and rests on these negative future occurrences.

Insurance is a risk sharer, this implies that as an individual with an insurance policy your future risk has been shared between you and the insurance company. Insurance helps an individual provide or fend for the family even when he/she is dead. 

When an individual that has a life insurance policy dies the premium paid by the individual is used to help the financial problems of the individual’s family according to what was agreed on between the individual and the insurance company. This alone will be an uplift for the family of the individual.

Economic Significance Of Insurance

Insurance generates a significant impact on the economy by mobilizing domestic savings.

Insurance enables to compasses loss, and financial stability and promotes trade and commerce activities those results in economic growth and development. Thus, insurance plays a crucial role in the sustainable growth of an economy. This is a list of top insurance companies globally in 2020. 

  1. Chubb Ltd.
  2. Travelers Companies Inc.
  3. Liberty Mutual
  4. Zurich Insurance Group
  5. American International Group 
  6. Berkshire Hathaway Inc.
  7. CNA Financial Corp.
  8. Hartford Financial Services
  9. Nationwide Mutual Group
  10. Tokio Marine Group

Role Of The Insurance Company

The major function of insurance is to safeguard against financial loss by having the “losses of the few” paid by “contributions of the many” that are exposed to the same risk. 

Insurance companies invest premium dollars collected annually in a wide range of investments in order to make revenue for themselves.

What are the disadvantages of insurance?

As we know whatever has an advantage has its disadvantage as well. Though insurance has more advantages than disadvantages. That makes it reliable.
The disadvantages of insurance:

  • The insurance company shows a bias toward the insured as it does not compensate for all types of losses.
  • It consumes more time to provide financial compensation because of lengthy legal formalities.
  • It does not provide enough financial facilities as the bank does.


This is all about the insurance and insurance typesinsurance’s related terms, and a lot about insurance. Well, you understand insurance well. Comment below if you have any suggestions that can be added to this article.

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